Agencies Counted Big Firms As Small

SBA Says It Will Correct Data on Federal Contracts

By Carol D. LeonnigWashington Post
October 22, 2008

U.S. government agencies made at least $5 billion in mistakes in their recent reports of contracts awarded to small businesses, with many claiming credit for awards to companies that long ago outgrew the designation or never qualified in the first place, a Washington Post analysis shows.

The Post examined a sampling of the $89 billion in contracts the agencies classified as small-business awards, which help them satisfy a congressional mandate to award nearly a fourth of all government work to small firms.

In the data The Post analyzed, federal agencies counted Lockheed Martin and its subsidiaries as "small" on 207 contracts worth $143 million. Dell Computer, a Fortune 500 company, was listed as a small business on $89 million in contracts.

The Navy claimed that $60 million in work it gave to Digital System Resources, a division of General Dynamics, went to a small firm -- a year after agencies were warned that DSR did not qualify. The Defense Department, which for a century has used Electric Boat to build submarines, labeled the firm as a small business for $1 million in supplies and services. The Department of Veterans Affairs said a computer glitch caused it to claim a $29 million payment to defense security giant CACI as a small-business award.

Government officials questioned by The Post acknowledged that mistakes are a long-standing problem, leading to exaggerated claims about the amount of federal work directed to a growing sector of the economy. The Small Business Administration, which annually reports on how agencies performed, said it thinks that many agency mistakes, including some The Post identified, have been corrected in a long-delayed report it plans to release today. The SBA has worked with agencies in the past several weeks to scrub errors from the data.

An SBA spokesman said it will report that small businesses obtained $83.2 billion in federal work last year -- about a $6 billion drop from what agencies claimed last month in a federal database SBA uses to track small-business awards.

"Are there lots of errors in the data? We have to say yes," said Calvin Jenkins, SBA's deputy associate administrator for government contracting. "But is it getting more accurate? Absolutely, it is. We rely to some extent on the public to help us fix some of these obvious errors."

The federal definition of a small business varies dramatically from industry to industry. For some, a business qualifies as small if it has fewer than 500 employees. For others, it must have less than $17 million in annual revenue.

Advocates for small businesses contend that the mistaken agency claims are more than a numbers game. When agencies take credit for awarding contracts to companies that are not small, they penalize legitimate enterprises that need government help, they say.

"I keep asking, 'How does this keep happening, and why isn't it being caught?' " said Robert Taddeo, president of Pacifica Electronics, a small business that repairs military aircraft communication systems. "What I've learned is the U.S. government is just lazy and lax in making sure to use legitimate small businesses that can do the work and keep down the cost to the taxpayers."

Lloyd Chapman, president of the American Small Business League, said the Bush administration has hurt the economy by not protecting small businesses' fair share. "For very dollar that was taken away from small business and miscounted, companies were forced into bankruptcy and to close their doors," he said.

The administration pledged last year to impose new controls to ensure greater reporting accuracy. But problems persist.

Acting SBA Inspector General Peter McClintock said he is frustrated. "It is clear that more needs to be done and that contracting offices need to be held accountable for accurate reporting," he said.

Congress in 1997 established the government-wide goal of awarding 23 percent of its work to small businesses because they play an increasingly critical role in driving the economy. Small firms now employ more than half of the nation's workers and are responsible for 60 to 80 percent of jobs created each year.

The 23 percent goal is in addition to tailored government programs that reach out to disadvantaged or minority firms by setting aside certain contracts for them or programs that give bidding preferences to small businesses.

Companies doing work with the government are entered into a huge government database known as the Federal Procurement Data System and maintained by the General Services Administration. Procuring agencies note whether the company qualifies as a small business.

To sample the data's accuracy, The Post examined contracts awarded to the top 200 winners that were also classified last month as small businesses, a total of about $13 billion in contracts. The analysis also scrutinized $1 billion in contracts won by eight specific Fortune 1,000 companies and their subsidiaries.

The most errors -- 70 percent -- were made by the Defense and Homeland Security departments and the General Services Administration, the Post analysis showed.

The Post found that 36 of the 200 companies at the top of the government's list do not qualify as small under government definitions and were improperly counted. Federal procurement officials either did not check or ignored readily available records, including the government's own small-business registry.

About $1.2 billion in work was won directly by international conglomerates with thousands of employees. That included global defense giants such as British Aerospace, General Dynamics, Northrop Grumman and Science Applications International Corp. (SAIC) and their subsidiaries.

SAIC and its subsidiaries were the biggest winners of work that was improperly counted. The San Diego-based information technology firm and its subsidiaries won $258 million in contracts initially classified as small-business awards -- $223 million from the Defense Department. SAIC spokeswoman Laura Luke said the firm never presents itself as small and alerts the government that firms it has purchased should lose their small-business label.

The Pentagon said it is reviewing The Post's findings, but suspects some acquired companies remained classified as small under long-term contracts that were not modified.

"The department takes the accuracy of the information reported to FPDS very seriously," said James Finley, defense's deputy undersecretary for acquisition and technology.

The main reason why mistakes persist is that no real sanctions exist for agencies that consistently overstate their small-businesses awards. The errors are unlikely to be caught, officials say, because the SBA lacks the staff and the clout to stop them.

"These big companies have been allowed to get away with this for so long, they don't even bother to change or hide their name," said Bill Miera, chief executive of Fiore Industries, a military contractor in New Mexico. "The motivation is purely profit."

Corporate officials who reviewed The Post's findings said the government sometimes is mistakenly categorizing behemoth contractors as small, but more often is failing to notice when small companies are absorbed by larger corporations.

Leaders at Lockheed Martin, Dell and many other large corporations acknowledge the errors but say they are not to blame.

"We have not found any instances that Dell Marketing L.P. or Dell Federal Systems L.P. was inaccurately described (by Dell) as a small business," Dell said in a statement.

Lockheed Martin said in a statement that the government appears to have miscounted as small businesses some of the firms it purchased, and added: "We do not bid on or compete for federal contracts as a small business."

Last year, the Pentagon counted as small-business contracts the $62 million it gave to SYColeman, a video production company in Arlington.

The millions of dollars paid to produce pro-American articles and broadcasts for Iraqi television and radio, however, went to a subsidiary owned by L-3 Communications. The L-3 conglomerate headquartered in New York is the one of the world's largest defense contractors and boasted $12 billion in revenue last year.

A spokesman for U.S. Special Operations Command said that labeling SYColeman a small firm was human error.

"On June 10, 2008, the SYColeman contract was listed in the federal database as a 'small business' in error after a USSOCOM contracting officer entered the wrong code," Lt. Cmdr. Marc Boyd wrote.

Sen. John F. Kerry (D-Mass.), chairman of the Senate committee on small business, said it is another example of the government's "phony numbers" and broken promise to the small businesses that make up 99 percent of U.S. companies.

"They aren't checking. They don't care," he said. "They simply aren't doing their job of looking out for small business."